A Lesser Known Statute Of Limitations

The last time I checked, IRS Appeals personnel count was down by approximately 20% and – no surprise – getting a case through Appeals is taking over a year.

There is danger – and potentially an immediate one – to taxpayers and tax advisors.

Take a look at this cheerful composition:

26 U.S. Code § 6532 - Periods of limitation on suits

(1) General rule

No suit or proceeding under section 7422(a) for the recovery of any internal revenue tax, penalty, or other sum, shall be begun before the expiration of 6 months from the date of filing the claim required under such section unless the Secretary renders a decision thereon within that time, nor after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.

(2) Extension of time

The 2-year period prescribed in paragraph (1) shall be extended for such period as may be agreed upon in writing between the taxpayer and the Secretary.

(3) Waiver of notice of disallowance

If any person files a written waiver of the requirement that he be mailed a notice of disallowance, the 2-year period prescribed in paragraph (1) shall begin on the date such waiver is filed.

(4) Reconsideration after mailing of notice

Any consideration, reconsideration, or action by the Secretary with respect to such claim following the mailing of a notice by certified mail or registered mail of disallowance shall not operate to extend the period within which suit may be begun.

We see the following:

The IRS has 6 months to respond to a claim for refund. If no response is forthcoming within that time, the taxpayer can sue for refund, as long as the suit or proceeding occurs within the two-year period beginning with the date the IRS formally disallowed the claim.

What if the IRS never responds to the claim? Your tax advisor (CPA or attorney) will likely recommend you file suit within 2 years from filing the claim. If you file, a tax CPA will hand you off to a tax attorney. A tax CPA can do a lot, but one must be a member of the bar to litigate.

What happens if you miss the Section 6532 deadline?

Let’s look at this next artful arrangement:

26 U.S. Code § 6514 - Credits or refunds after period of limitation

(a) Credits or refunds after period of limitation

A refund of any portion of an internal revenue tax shall be considered erroneous and a credit of any such portion shall be considered void—

(1) Expiration of period for filing claim

If made after the expiration of the period of limitation for filing claim therefor, unless within such period claim was filed; or

(2) Disallowance of claim and expiration of period for filing suit

In the case of a claim filed within the proper time and disallowed by the Secretary, if the credit or refund was made after the expiration of the period of limitation for filing suit, unless within such period suit was begun by the taxpayer.

(3) Recovery of erroneous refunds

For procedure by the United States to recover erroneous refunds, see sections 6532(b) and 7405.

(b) Credit after period of limitation

Any credit against a liability in respect of any taxable year shall be void if any payment in respect of such liability would be considered an overpayment under section 6401(a).

Section 6514(a)(2) can be brutal: the IRS is prohibited from issuing the refund unless within such period suit was begun by the taxpayer.

Oh, this is all big corporate tax stuff, you say. Unless your name is Apple or Nvidia, can this ever reach you?

Yepper.

What if you filed for an ERC (employee retention credit) and (1) have never heard back from the IRS or (2) did hear back but the IRS disallowed the claim? The IRS has been using Letter 105C (if they disallowed the ERC claim in full) or Letter 106C (if they partially disallowed the claim). A 105C letter will include language like this:

         

There is the disallowance language that Sections 6532 and 6514 allude to.

When was the IRS sending out these letters?

After running ERC claims through a risk-scoring algorithm, the IRS sent out approximately 28,000 letters 105C and 106C during the summer of 2024. If the taxpayer responded (to the 105C or 106C), the IRS would then conduct an mini-audit before sending the file to Appeals.

2024 plus 2 years equals 2026 – your two-year statute of limitations is coming up.

Is there a way to avoid filing in Court but still preserve your rights to a refund?

Yes. Let’s go back to Section 6532(a)(2).

There is a form that goes with it.

  

Here is the Internal Revenue Manual on Form 907:

On first impression, I like the Form 907 option. What more do we need to know about it?

(1)  First, you are still within Section 6532, so this must be done within the 2-year window.

(2)  Both parties – you and the IRS – must sign Form 907.

(3)  If the case is being actively worked, the Revenue Agent or Appeals Officer can hopefully help obtain the appropriate IRS signature.

But what if the case is not being actively worked?

There are several ways this can happen:

·      The file is lost (I had one lost in IRS Kansas City a few years ago; it held up a real estate closing).

·      You are waiting for the protest to be transferred to Appeals.

·      The protest has been transferred to Appeals but remains unassigned.

·      The protest was transferred and assigned but your AO is no longer working at the IRS. It again is … unassigned.

·      You never even filed a protest to either Letter 105C or 106C.

The IRS considers Form 907 to be an internal form, to be initiated by IRS employees. If you have settled on Form 907 and your back is to the wall on obtaining an IRS signature, consider the Taxpayer Advocate.

But give yourself breathing room. I suspect that trying to obtain an IRS signature on short notice – whether actively worked or not, assigned or unassigned – will prove futile.

You might have to file suit to preserve the claim.

 

No Tax On Overtime

 

Let’s look at the overtime tax changes.

This is one of the provisions from the One Big Beautiful Bill (OBBB) that the president signed on July 4, 2025. It is retroactive to January 1, 2025, and we will be seeing the overtime deductions on individual tax returns filed in 2026 for tax year 2025.

Note that I said “deduction.” As we have discussed before, tax credits are generally worth more than a deduction. The tax impact of a credit is dollar-for-dollar. The tax impact from a deduction depends on your tax rate (if you are at a 22% rate, then your deduction is worth 22 cents on the dollar).  That said, we will take the break.

The key thing here is that the break applies to overtime, so you must be in a job that pays overtime. Multiple parties might address overtime requirements: the federal government, a state government, a union, a voluntary arrangement by your employer, but only the federal definition will work here.

The Code looks at the Fair Labor Standards Act (FLSA), which introduces us to the terms: “exempt” and “nonexempt” employee. Generally speaking, nonexempt employees are required to be paid overtime, whereas exempt employees are not. The overtime pay is defined as 1.5 times the regular pay rate for all hours over 40 and that itself over a 7-day period.

COMMENT: The definition of exempt looks to a duties test (executive, administrative, or professional). A CPA will be considered a professional and therefore exempt for purposes of the FLSA.

Let’s say you are nonexempt under FLSA. You next question should be: how is your overtime computed? The FLSA requires 1.5 times the regular pay rate. Let’s say that your employer pays double time (I wish). How much is your overtime and how much qualifies for the deduction?

EXAMPLE: You make $35/hour and your employer pays double rate for overtime. You have 150 hours of overtime for the year.

150 hours times $35 times 200% = $10,500

That is what you were paid for those overtime hours, but that is not the deduction.

We have previously discussed how the Code likes to take a common term and restrict it by placing “qualified” in front. Your qualified overtime deduction caps out as follows:

150 hours times $35 times 50% = $2,625

Note that the deduction does not apply to the base pay ($35) for your overtime hours. It applies only to the additional pay, and the additional only up to 50% ($35 times 50%). Chances are good that is not the way you think of overtime, but we are talking tax.

COMMENT: Not quite “No Tax On Overtime.”

The FLSA refers to a 7-day period. There are occupations (firefighters come to mind) that are paid on a different cycle. The Code allows for this variation, and we will not discuss it further.

There is a significant reporting issue for 2025 returns to be filed in 2026: the 2025 Form W-2 does not have a box to report “qualified” overtime. In fact, it does not have a specific box to report overtime at all, although an employer may use an available box (probably box 14) to report. The tax bill (OBBA) was signed by the president on July 4, 2025, a bit late into the year to reasonably demand retroactive changes in W-2 reporting. The new 2026 W-2 forms (for returns to be filed in 2027) will be changed to include the amount of qualified overtime.

But what are we to do for the 2025 returns filed in 2026?

First, it is a concern only if you are paid overtime. That knocks out quite a few of us.

Second, I suspect that tax preparers will routinely request a copy of your last 2025 paystub, if you are paid overtime. The stub should have information showing the calculation. Granted, the numbers may have to be reworked, but it is a logical place to start.

Third, your employer might voluntarily provide this information for 2025, in which case you likely have an attachment to your Form W-2. I suppose an employer could alternatively send you to a website for this information. There is a one-time reporting safe harbor for employers: if they tracked your overtime for the second half of 2025 (remember, OBBA was signed July 4, 2025), they can extrapolate to the full 2025 year. This safe harbor goes away for 2026, as employers will be required to track and report actual detail.

COMMENT: There is a somewhat similar W-2 reporting issue for qualified tips. The difference between the overtime deduction and the tips deduction is there is (some) existing tip reporting on the W-2. The tax preparer has a place to start. The preparer has no similar starting place for overtime.

Like the tips deduction, this is not an itemized deduction. You can get this deduction whether you itemize or not.

There is an overall limit on the deduction. If you are single, the limit is $12,500. If you are married, the limit is $25,000.

And this overall limit is reduced if you have too much income. Too much starts at $150,000 for singles and $300,000 for marrieds. Beyond that point, you will phase-out at a dime on the dollar.

If you are married, you will need to file a joint return.

You will need to provide your social security number to claim the deduction. Leave it out and the IRS will automatically revise your tax return and send you a bill.

A bonus will not qualify for this deduction. It must be overtime, even if the bonus is in lieu of overtime. Stand-by or on-call pay will not qualify either.

Like tips, the overtime deduction is for federal income tax only. It will not reduce your FICA taxes, and your state will decide whether you have a state equivalent to the federal tax deduction. Some states will; other states will not.

In case you were wondering: you cannot claim the overtime deduction and the tips deduction on the same income. One or the other, folks.

The deduction has a shelf life of four years. It will go away (unless a future Congress extends it) after the 2028 returns to be filed in 2029.

BTW, you can now revise your 2026 federal Form W-4 (telling your employer how much to withhold) to allow for your expected qualified overtime deduction. You did not have this option (directly; one could get there indirectly) for 2025. Why the difference between 2025 and 2026? Just look to November.

And there you have the new overtime deduction.